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spk01: Good day and welcome to the Pagina Investments Management results for the first quarter of 2021 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw from the question queue, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Jessica Doran. Please go ahead.
spk02: Thank you, Operator. Good morning, and thank you for joining us on the Pazina Investment Management First Quarter 2021 Earnings Call. I'm Jessica Doran, Chief Financial Officer. With me today is our Chief Executive Officer and Co-Chief Investment Officer, Rich Pazina. Our earnings press release contains the financial tables for the periods we will be discussing. If you do not have a copy, it can be obtained in the investor relations section on our website at www.pizina.com. Replays of this call will be available for the next two weeks on our website. Before we start, we need to remind you that today's call may contain forward-looking statements and projections. We ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from today's comments. Please note that we do not undertake to update such information to reflect the impact of circumstances or events going forward. In addition, please be advised that due to prohibitions on selective disclosures, we do not, as a matter of policy, disclose material that is not public information on our conference call. Now let me turn the call over to Rich, who will discuss our current view of the investing environment.
spk00: Thanks, Jessica. Last quarter in these remarks, I observed that clients were asking us whether the fourth quarter's big value run was the start of a cycle or just another head fake in the decade-long run for growth. Now after two consecutive quarters of value outperformance, we're being asked, did I miss the value cycle? Is it over? Needless to say, short-term thinking still dominates. So permit me to go out on a limb. I believe this is the beginning of a value cycle. I believe this cycle has a good chance of being long, and I believe we are still in the cycle's very early days. Asset management has been defined as the practice of taking imperfect and incomplete information about the present and using it to make projections about the future. In other words, I know that I don't really know the future with certainty. However, for the past year, we have been saying that the signs of a pro-value cycle would appear in one or more of the following four ways. First, a recession would be recognized. The COVID-induced recession was clear to all. Looking at the data from the past 14 recessions in the US over the last century, We see that in the five years following the start of recessions, value strategies outperformed the broad market by an average of 530 basis points per year. Second, interest rates would stop falling. In most of the developed world, they have already stopped falling, and the tightening of the labor markets that we see as we talk with companies reinforces our expectations that they are unlikely to reverse and start falling again. Third, growth expectations for the high flyers would slow. And while this hasn't clearly happened, consider this. Wall Street analyst consensus earnings growth estimates for a portfolio of deep value stocks over the next two years is around 23% a year versus 17% a year for the Russell 1000 growth index. You can buy the deep value stocks for 11 times these forward earnings versus 27 times for the growth stock portfolio. And finally, the incumbents would not be destroyed by the disruptors. And I would point to electric vehicle news from the incumbents to reinforce that all of the market is unlikely to shift to the new entrants. Over the past 50 years, pro-value periods in the market have lasted on average 62 months and generated 138 percentage points of excess returns. This compares with six months and approximately 39 percentage points so far in this cycle. Further, the depth of prior anti-value cycles appears to be correlated to the length of the pro-value cycle. Needless to say, following the deepest and longest anti-value cycle on record, we're optimistic about the opportunity for a long pro-value cycle ahead. Finally, let me make a few observations about our business. We experienced a small net outflow of approximately $200 million in the first quarter. A significant part of the outflow reflects clients rebalancing their portfolios after gross returns for the past 12 months ranging from 69% to 126% in our various strategies. We wouldn't be surprised if some of this outflow continues. Nevertheless, we've had positive net flows during the last four consecutive years ending in March and have had only one quarter in the past 16 where our trailing 12-month net flows were negative. In addition, our pipeline has started to show signs of growth and reflects the normal lag we would expect as a pro-value cycle begins. Thanks for listening, and I look forward to answering your questions later.
spk02: Thank you, Rich. To share our financial results, we reported diluted earnings of 24 cents per share for the first quarter. compared to 22 cents last quarter and zero cents per share for the first quarter of last year. Revenues were $45.9 million for the quarter and operating income was $23 million. Our operating margin was 50.2% this quarter, increasing from 45.7% last quarter and from 32.1% in the first quarter of last year. Taking a closer look at our assets under management, we ended the quarter at $49.2 billion, up 13.6% from last quarter, which ended at $43.3 billion, and up 83.6% from the first quarter of last year, which ended at $26.8 billion. The increase in assets under management from the fourth quarter of last year was driven by market appreciation, including the impact of foreign exchange, of $6.1 billion, partially offset by net outflows of $0.2 billion. The increase in the first quarter of last year reflects $22.4 billion in market appreciation and foreign exchange impact. On March 31, 2021, our assets under management consisted of $19.4 billion in separately managed accounts, $26.9 billion in subadvised accounts, and $2.9 billion in our PAVINA funds. Compared to last quarter, assets under management across all channels increased, with separately managed account assets reflecting $2.4 billion in market appreciation and foreign exchange impact, partially offset by $0.3 billion in net outflows, subadvised account assets reflecting $3.4 billion in market appreciation and foreign exchange impact, and $0.2 billion in net inflows, and assets in PISINA funds being $0.3 billion in market appreciation and foreign exchange impact, partially offset by $0.1 billion in net outflows. Average assets under management for the first quarter of 2021 were $45.4 billion, an increase of 20.4% from last quarter, and 28.2% from the first quarter of last year. Revenues increased 15.1% from last quarter, and 32.3% from the first quarter of last year. The fluctuation in revenue primarily reflects the variance in average assets under management over the period, as well as performance fees and fulcrum fees recognized. During the first quarter of 2021, no performance fees were recognized compared to $1.1 million in performance fees recognized last quarter and no performance fees being recognized during the first quarter of last year. Revenues also reflect the reduction in the base fees of certain accounts related to the fulcrum fee relationship of fulcrum fee arrangements, excuse me, of one client relationship. These fee arrangements require a reduction in the base fee if the investment strategy underperforms its relevant benchmark or allow for a performance fee if the strategy outperforms its benchmark. During the first quarter of 2021, as well as the fourth and first quarters of 2020, we recognized $1 million reductions in base fees related to these accounts. These fees are calculated quarterly and compare relative performance over a three-year measurement period. To the extent the three-year performance record of these accounts fluctuate relative to their relevant benchmarks, the amount of base fees recognized may vary. Our weighted average fee rate was 40.4 basis points for the quarter compared to 42.3 basis points last quarter and 39.1 basis points for the first quarter of last year. The impact of performance fees and fulcrum fees, as well as shifts in asset mix, are all contributors to changes in our overall weighted average fee rate. Looking at operating expenses, our compensation and benefits expense was $19.1 million for the quarter, increasing from $18 million last quarter and remaining flat from $19.1 million for the first quarter of last year. The increase in the fourth quarter of 2020 reflects compensation expenses recognized in the first quarter associated with tax payments and the company's employee profit sharing and savings plan, which generally do not occur during the year. DNA expenses were $3.7 million for the first quarter of 2021 compared to $3.7 million last quarter and $4.4 million for the first quarter of last year. The decrease in general and administrative expenses from the first quarter of 2020 primarily reflects a decrease in travel and entertainment and professional fees. Other income was $4.2 million for the quarter, driven primarily by the performance of our investments. Looking at taxes, the effective tax rate for our unincorporated and other business taxes was 3.2% this quarter compared to 2.9% last quarter, and 29.9% in the first quarter of last year. The tax rate for the first quarter of last year was impacted by the decline in income before taxes during the period. We expect the effective rate associated with the unincorporated and other business taxes of our operating company to be between 3 and 5% on an ongoing basis. Our effective tax rate for our corporate income taxes, ex-UVT and other business taxes, was 26.4% this quarter compared to our effective tax rate of 24.5% last quarter. Our effective tax rate for the first quarter of last year was 100%, again reflecting the decline in income before taxes during the period. The fluctuation in these effective rates also reflect certain permanently non-deductible expenses. We expect this rate, excluding these items, to be between 24% and 26% on an ongoing basis. The allocation to the non-public members of our operating companies was approximately 78.4% of the operating company's net income for the first quarter of 2021, compared to 77.3% last quarter and 74.5% for the first quarter of last year. The variance in these percentages is the result of changes in our ownership interest in the operating company. During the quarter, through our stock buyback program, we repurchased and retired approximately 294,000 shares of Class A common stock and Class B units for $2.5 million. At March 31st, there was approximately $8 million remaining in the repurchase program. At quarter end, our financial position remained strong with $29.7 million in cash and cash equivalents, as well as $7.3 million in short-term investments. We declared a 3 cent per share quarterly dividends last night. Thank you for joining us. We'd now be happy to take any questions.
spk01: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Showing no questions, this concludes our question and answer session, and it also concludes our conference for today. Thank you for attending today's presentation. You may now disconnect.
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